The market’s going down… AGAIN? Check out this important economics lesson from 1945! [Wednesdays: The Independent Investor]
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We hope you’re having a great day so far.
Let’s talk about another great investing insight in today’s article. Every Wednesday, we discuss these kinds of topics because we believe good investing will help us achieve true financial freedom.
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Keep reading to learn an important economics lesson from 1945.
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
Lately, recession seems to be a lot of people’s—especially those in the finance sector—most used word.
Inflation is high…
We’re currently in a bear market…
We’re still in the COVID-19 pandemic…
Generally speaking, lots of people can’t stop talking about the downturn we and the markets might be facing.
… but do all these things mean we’re definitely heading towards a “recession?”
Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, says we must first understand the meaning of recession before answering that question.
According to the U.S. National Bureau of Economic Research (NBER), a recession is a “significant decline in economic activity spread across the economy for more than a few months.”
That’s quite a loose definition.
For Professor Litman, lots of factors play into a recession. These include:
- Gross domestic product (GDP)
- Consumer spending
- Household income
… and more.
Here’s the thing: Taking all these factors into consideration adds a level of complexity to actually figuring out if there’s a recession or not. That’s why some people simply look to the traditional sign that a downturn is on the horizon.
Since official numbers for GDP, consumer spending, and the likes take so long to come in, Professor Litman states it’s impossible to know if an actual recession is happening until it’s too late.
In other words, when we learn the truth, we’re already around two quarters into a recession. That sounds terrifying, right?
However, for some, it doesn’t necessarily feel like an economic downturn nowadays…
Professor Litman says without looking at GDP growth in the last two quarters of the market, your everyday life might not have changed as much as you’d expect it to.
That’s because the economy is actually doing quite well—the employment rate is strong, consumer demand is healthy, and there are no widespread credit issues.
In short, we’re only in a “recession” based on its narrow definition (assuming we’re in one at all).
An Important Economics Lesson from 1945
Professor Litman says history may not repeat itself, but it certainly “rhymes.” For him, what’s happening in the markets nowadays could be following a similar playbook to the 1945 recession.
Let’s recall what happened back then…
In 1945, the U.S. produced “beyond its maximum potential GDP” during World War II. As a result, the government had to cut spending when WWII ended to bring back the GDP to its robust state.
These days, 2022 is similar to 1945… it’s just that now, we’re coming out of the COVID-19 pandemic.
Throughout the health crisis, the U.S. government created the Main Street Lending Program, Paycheck Protection Program loans, and multiple waves of stimulus checks. It did everything it could to keep the economy going.
It has been about a year now since the stimulus checks ended, but year-over-year comparisons still aren’t looking as good. The U.S. has already recorded one quarter of negative real GDP growth, and another one seems to be looming.
Despite that, Professor Litman says the economy looks strong. Businesses are recovering, and employment figures are encouraging.
What does this tell you?
What’s happening in the markets now has already happened—or is similar to what happened—in the past. That’s why as an investor, you have to learn to go beyond what the stock market or economic charts simply show.
Study AND recognize patterns. According to Professor Litman, this is paramount in the investing world.
Besides, even during the 1945 recession, the market shrugged off the mainstream financial media’s headlines. Instead, wise investors focused on the fundamentals.
We hope you learned a lot from today’s economics lesson from 1945!
Keep in mind that sensational financial news can stir up fear and greed, leading you to make bad investment decisions.
So, avoid panicking at the onset of negative news or talks like recession, inflation, etc. Be a wise investor—not predicting but reacting to the markets, and studying similar patterns in the stock market.
Doing these will tell you a lot about what to expect in the present, especially how you can successfully invest today.
Stay tuned for next week’s “The Independent Investor” article!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
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“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
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